Personal Finance

Economic turmoil forces car dealers to offer substantial discounts

In an attempt to boost sales, vehicle dealers are offering consumers significant discounts on the list price of new vehicles, while financial institutions are in some instances extending finance terms to up to seven years.

This is happening against the backdrop of household disposable income being under severe pressure because of high inflation, rising fuel prices, currency volatility, increased borrowing costs because of high interest rates, and the poor macroeconomic environment.

ALSO READ: What car dealers can and cannot do when selling pre-owned vehicles

Advertisement

TransUnion Africa CEO Lee Naik said on Monday these factors have resulted in a more than 8.4% year-on-year decrease in the sale of financed vehicles in the third quarter of 2023 and new passenger vehicle sales declining by 9.1% in the same period.

Naik said financially distressed consumers are gravitating towards more affordable options, including older, lower-cost used vehicles.

“Alternative financing solutions are coming into play and dealerships are offering trade support in the form of discounts and incentives on new vehicles on a scale that we have never seen before, in some cases also extending the finance period up to 84 months,” he said.

Advertisement

Vehicle price stats

Naik’s comments coincided with the release by TransUnion of its vehicle price index for the third quarter of 2023, which shows that the rate of increase in new vehicle prices increased to 6.5% in the third quarter of 2023 from 5.8% in the corresponding quarter in 2022, while the consumer price index (CPI) declined to 5% from 7.5% in the same period.

The rate of increase in used vehicle prices slowed to 8% in the third quarter of 2023 from 9% in the same quarter in 2022.

“As things stand in the third quarter in 2023, new vehicle prices have increased above inflation on the new list price. However, manufacturers are giving discounts and trade assistance to boost sales,” he said.

Advertisement

National Automobile Dealers’ Association (Nada) national chair Brandon Cohen concurred, stating that most of the support is offered by original equipment manufacturers (OEMs) or importers to stimulate sales, and banks will finance up to 84 months provided their internal criteria are met.

ALSO READ: June vehicles sales a 1-2 for Toyota as Hilux leads Corolla Cross

“We are also seeing leasing and step-payment options offered by the financiers to assist with sales in the dealer environment. We certainly are seeing a number of interventions in the market,” he said.

Advertisement

Cohen said new vehicle discounting would however need to be looked at on a brand and model basis.

He said dealers will receive a recommended retail price per model from their OEM or importer, and market forces will then dictate the final price the vehicle is sold for to the consumer in terms of the support and discounts available.

“The key element is that, other than those dealers operating under the agency model, the list price of a vehicle and the final sale price is often extremely different,” he said.

Advertisement

The dealership agency model involves OEMs setting the price of their vehicles and selling them directly to consumers, managing the customer relationship and assuming responsibility for inventory and administration while dealers act as an agent, focusing on providing support and services to customers.

Very flexible buyers’ market

Naik said the depth of the pricing strategy that dealers have adopted to spur new vehicle sales is evident in the 12.9% discount cited in the third quarter of 2023 for an entry-level urban vehicle, which means the after-discount price is actually lower than the listed price in the third quarter of 2022.

Cohen confirmed that new vehicle discounting is happening, and higher prices are also being paid for trade-in vehicles to settle outstanding obligations to the banks, with step-payment financing, OEM support, and longer finance periods all contributing to a very flexible buyers’ market.

He added that the introduction of new entry-level models from existing players and Chinese brands is also assisting in offering good value to consumers.

Naik said the impact of new vehicle discounts is evident in the used-to-new vehicle financing ratio, which provides insight into consumer preferences for used versus new vehicles.

He said this ratio declined from 2.05 used vehicles sold for every new vehicle sold in the third quarter of 2022 to 1.41 used vehicles sold for every new vehicle sold in the third quarter of 2023.

“This means that fewer used vehicles are being financed than previously,” he said.

ALSO READ: Electric vehicles fire-prone?

Cohen said the price of new vehicles from some of the traditional market leaders often used to lead to people purchasing their desired model in the used space, but with all the support on offer as well as the introduction of the Chinese brands and new entry-level derivatives in the other brands, the new vehicle opportunities presented to consumers “very often may be better for the consumer than a traditional used vehicle”.

“We are also seeing used vehicle pricing coming off a higher base due to the period when new cars were in short supply and used vehicles were being purchased by dealers at inflated values.

“The normalising of this will see used vehicles repriced downwards, which should also assist sales in this segment,” he said.

Increase in average loan amounts

Naik added that a significant market trend is the notable increase in the average loan amount for financed vehicles.

He said the average loan value increased by 13.2% to R359 000 in the third quarter of 2023 from R317 000 in the same quarter in 2022.

“This increase reflects not only rising prices but also a combination of changing consumer preferences and a shift toward premium vehicle segments for some buyers,” he said.

Naik said the focus of the discounting strategy is premium vehicles, where there was a price increase of just 5.6% compared to the third quarter of 2022.

He said price increases of 6.6% for small sport utility vehicles (SUVs), 6.9% for crossover models, and 7.3% for mid-SUVs follow.

Hatchback and hybrid models, both at 8%, show the highest increase.

In contrast, used vehicle prices showed dramatic increases, he said. Naik said there had been a 19.4% rise in the three-year price increase for mid-size SUVs, with the price increases of 18.6% for crossover vehicles not far behind and small SUVs at 17.6% and premium vehicles at 17%.

Dealerships stepping up to the challenge

He said delinquency rates on existing credit lines had risen concurrently with the macroeconomic factors, resulting in lenders tightening their criteria for new credit and alternative financing solutions coming into play.

Naik said overall, the vehicle price index figures for the third quarter of 2023 underscore a contraction in the vehicle market and highlight the need for strategic agility and adaptability among industry stakeholders.

“Manufacturers and dealerships have stepped up to the challenge.

“Their efforts to aid consumers to enter or re-enter the auto market by way of discounts, incentives and focusing on monthly payments rather than gross price, are paving a path toward potential market stabilisation and growth that flies in the face of the current economic headwinds.”

This article was republished from Moneyweb. Read the original article

For more news your way

Download our app and read this and other great stories on the move. Available for Android and iOS.

Published by
By Roy Cokayne
Read more on these topics: Vehicle financingvehicles